Accounting and its processes have evolved over the past couple of decades, requiring a shift in approach, thoughts, and commitment rather than just an updated set of skills. Accounting process automation today stands as the top-most trend as more businesses are transforming their model to become digital businesses and accountants have no choice but to stay aligned with this technology.
With the help of the best accounting software, data analytics and accounting process automation help every business to account, analyze, visualize, extract, collaborate, and deal with the right partners to drive results in real-time.
An accounting software together with Billing and Invoicing Software, Audit Software, Budgeting Software, Expense Management Software, Financial Planning Software, Bankruptcy Software, Accounts Payable Software, Church Accounting Software, Expense Report Software, Investment Management Software, Stock Portfolio Management Software, Accounts Receivable Software, and Accounting Practice Management Software can be a great asset for any organization.
This article highlights the tricks to master the art of accounting.
What Is Accounting?
Accounting is a process of recording financial transactions and measuring business performance. These excessively detailed financial statements help organizations in decision-making and taxation processes. Accountants and bookkeepers can summarize such data and convert them into analytical reports to keep an overview of business operations.
There are four types of business accounting based on the functionality and model of a business.
- Financial Accounting: Financial accounting keeps track of everyday transactions and converts them into daily, weekly, monthly, and yearly statements. Through this accounting method, businesses can ensure compliance with proper rules and regulations to attract investors/stakeholders. With financial accounting, companies can make informed decisions. Several organizations are leveraging this method in this age to create statements, balance sheets, and cash flow statements.
- Managerial Accounting: The process of managing financial information and delivering financial reports to managers is known as managerial accounting. The prime objective of this method is to help managers to make the best-suited operational decisions for their business. Managerial accounting statements are confidential and are only shared with concerned members of companies. This method is divided into three categories which are used based on the business requirement.
- Strategic management
- Risk management
- Performance management
- Cost Accounting: Cost accounting fits perfectly with industries that depend on resource management costs. This method is used to record the operational cost of the manufacturing process and increase cost-effectiveness. Hence, this accounting system pays close attention to fixed and variable costs and their effect on the financial status of companies. This helps companies to reduce variable expenses and increase profit margins. It is considered a type of managerial accounting.
- Tax Accounting: Tax accounting is a method used to report, calculate and file the taxable income of a business. It also focuses on preparing public financial statements, which show the assets and liabilities of organizations. Companies follow taxation and make tax payments based on revenue, deduction, and government credits. Tax accounting is used to minimize taxes, avoid penalties and follow the Internal Revenue Code outlined by the IRS. Tax advisory services, income tax, planning, and preparing tax returns become easy with tax accounting. There are two types of taxes.
- Direct tax
- Indirect tax
Benefits of Accounting
- Accounts Payable: Tracking multiple payments can become difficult for accountants. With accounting, companies can keep track of invoices and pay them at the correct time. The accounting software keeps a tab of such payments and notifies accountants to avoid unwanted charges such as late payment fees, overdue charges, etc.
- Bank Reconciliation: It is one of the essential core features of accounting in which banking statements are streamlined with accounting software. Bank reconciliation quickly helps to identify fraudulent activities, prevent mistakes, and helps to track financial movements.
- Bookkeeping Management: Accountants maintain bookkeeping to track finances, manage cash flow, plan future activities, and control the financial operations of firms. Bookkeeping management significantly impacts decision-making, investor communication, accurate business assessment, and timely taxation.
- Budgeting and Forecasting: Planning, budgeting, and forecasting help companies keep robust financial reports. The accounting software tools draw out detailed information on different financial aspects of companies to understand their growth. These details also help firms to minimize risks and convert investments into profits.
- Financial Reporting: Financial reporting gives a transparent and clear state of business finance. This data-driven information helps companies to communicate with investors and stakeholders, explaining balance sheets, income statements, cash flow management, and overall financial activities.
- Fund Accounting: Mainly, non-profitable organizations and government bodies maintain fund accounting to explain incomes and expenses. This report highlights the accountability of financial transactions rather than profitability.
- Payroll Management: Large companies with a large number of employees demand proper management, recording, and analysis of employee compensation. AI-integrated accounting software ensures employees get their salary on time and maintains transparent payroll management as an administrative task.
- Purchase Orders: As an integral part of accounting, companies maintain purchase orders to avoid entering duplicate entries and keep track of incoming orders. Organizations use these records as legal documents to avert misunderstandings and financial disputes. The accounting software can precisely keep track of goods and services and integrate with inventory management to avoid shortage or overdose.
- Tax Management: Accounting ensures easy tax calculation and strict tax regulation adherence. A well-functioning accounting system helps to apply the right taxes, calculates multiple taxes, and gives a better understanding of taxes. Companies rely on accounting software to save money by properly filing tax returns.
Why Is Accounting A Substantial Part of Business?
According to Warren Buffett, “Accounting is the language of business.” It is no secret that firms of every size require excellent accounting skills to run a successful business. An in-depth knowledge of accounting is necessary to understand profit and loss, make productive financial strategies, expand business activities, comprehend growth ratios, make precise investment evaluations, and many other business-related management.
The following reasons explain why accounting is an integral function of companies of all sizes.
1. Record Financial Activities
Accounting helps in the efficient and systematic recording of every transaction, due to which it has become the backbone of every business. The organized records support owners in explaining to investors, stakeholders, and consumers their vision, goals, targets, and achievements throughout different periods. Using financial recording, multiple industries are measuring their financial growth compared to previous years and taking reference from them. Accountants can easily identify and eliminate liabilities, maintain required cash flow, and effortlessly prepare reports and analytical data for an overview of business operations. Precise accounting records avert the chances of fraudulent activities in companies.
2. Measure Business Performance
Financial statements decide the monetary success or failure of a business. Companies can evaluate business performance by documenting expenses, incomes, debts, loans, profit margins, loss in profit, etc., throughout the year. Annual statements clearly show an exact monetary gain, including Key Performance Indicators(KPIs). This data can also help owners in averting unnecessary expenditures, increasing profit rates, and plan competitive strategies. This data is also responsible for guiding owners about bottleneck situations, return of investments, and possible business expansion.
3. Adhere Legal Obligations
A structured method of accounting ensures proper reporting of financial assets and liabilities. In every organization, the accounting team does the calculations to understand how much tax they owe and avoid any chances of legal audits and penalties. Companies can share these reports with tax authorities, shareholders, and regulators to point out sales tax, income tax, VAT, pension funds, etc. In the USA, the Internal Revenue Service(IRS) follows the standardized accounting process to examine the gross revenues and net incomes of firms. Filing financial statements in the correct order and keeping tax records can keep companies away from legal issues.
4. Plan Strategic Moves
Accounting has the power to make or break businesses. It is used to meet the basic requirements of a business, like budgeting, resource allocation, investment & loan applications, etc., including new business adaptations. The market demands and trends keep changing, due to which corporations need to quickly accept new tactics to stay in the market. Real-time transactional updates support startups and small businesses in managing cash flow and maintaining liquidity, the primary objective of staying still in a competitive environment. PWC’s survey says 40% of CEOs have realized they need to spend more time evolving their business to make it economically viable. For this, accountants can actively work towards creating a financial model that eliminates unwanted expenses with active and instant communication.
5. Prevent Fraudulent Activities
The main requirement of accounting is to note down every transaction in one place. In large enterprises, it becomes difficult for accountants to remember and track every penny. Due to the digitalization of accounting, accountants can easily add a double entry in real-time to have up-to-date money records. This allows accountants to prevent fraud and keep a tab of every penny.
6. Strengthen Financial Decision-making Process
With the possibility of a recession, it is more important than ever to focus on working capital rather than only prioritizing revenues and cost estimates, says Forbes. Therefore, owners need to be prepared to convert any unpleasant situation into lucrative opportunities and maintain the stature of firms. Several critical decisions are made based on the financial status of companies, such as evaluating current business trends for profitability, planning precautionary budgets for unexpected situations, assessing the possibility of future expansion, adopting different business models, etc.
What Are The Causes Of Accounting Errors?
Accounting errors happen unintentionally due to a lack of knowledge and carelessness. Accountants and bookkeepers can immediately rectify them. If there is a long chain of errors, accountants must locate and amend them to avoid any more mistakes.
These accounting errors can lead to massive consequences if ignored in the initial stage. These errors can cause the credibility of companies, miscommunication with consumers, mismanagement of resources, and poor financial performance.
Here are some of the prime accounting errors that can lead to major mistakes in creating balance sheets and cause the integrity of an organization.
1. Error Of Principle
When accountants and bookkeepers do not follow the Generally Accepted Accounting Principle(GAAC) and record transactions in the wrong place, that’s when the error of principle takes place. Several make a mistake by adding personal expenses under the business expenses.
Solution: Use error-free accounting software to avoid basic accounting errors. The AI-integrated accounting systems are capable of managing double entries simultaneously to avoid any minor mistakes. This can increase employee satisfaction.
2. Clerical Error
Errors other than the error of principle are clerical errors. Accountants can make these errors while writing data entries. Following are clerical errors.
- Error of omission: When a transaction is skipped.
- Error of commission: When a transaction is recorded in the wrong subsidiary account or ledger with the correct amount.
- Error of duplication: When the same transaction is entered more than once.
- Error of entry reversal: When a transaction is recorded in the wrong direction.
- Error of transposition: When a transaction is recorded with the wrong amount.
- Error of original entry: When transactions are recorded with basic accounting mistakes like a transposed number, information errors, etc.
Solution: The accounting software runs massive data during every data entry and notifies accountants instantly about duplication and omission. The system can smartly enter transactions at the right place, reducing the chances of human errors.
3. Internal Exchange Error
It becomes complicated to maintain accuracy in accounting information in large enterprises where different departments are given individual budgets to run operations. Accountants cannot monitor every settlement as multiple transactions take place in a moment.
Solution: Companies can streamline various accounting activities from different departments with accounting software to produce organized statements while minimizing human interference.
4. Compensation Error
Compensation errors are created to nullify other sets of errors. The number of compensation errors is based on other errors to remove the effect of wrong data entry. These errors help accountants to terminate unintentional errors and provide the actual view of the financial position of companies.
Solution: Using integrated accounting software can reduce multiple errors and allow employees to divert their minds to creative measures.
The global accounting software marketis estimated to reach $70.2 billion by 2030.
6 Tips to Master the Art of Accounting
Accounting has always been one of the most prestigious and demanding career options. One needs to constantly upgrade their skills in order to set a strong foot at the workplace, forge a healthy relationship with clients, and set themselves exclusive from others. These are the top 6 gambits for achieving a unique place in the field of accounting.
1. Enhance Your Technical Skills
Sharpening technical skills is a crucial task in order to improve the knowledge and capabilities to effectively utilize accounting software, computer tools, and accounting principles. Accountants must familiarize themselves with cloud-based accounting, automation, ERP, advanced Excel, visual basic, QuickBooks, Hyperion, Business Intelligence Software(IBM), SQL, big data analysis, advanced modeling techniques, etc., to improve their workflow. Employers usually choose candidates with up-to-date knowledge of the latest technology and updates.
2. Build Up Your Soft Skills
Nowadays, soft skills are considered a part of expanded potential services in the accounting profession. Employers are interested in candidates with collaborative knowledge of hard and soft skills. Embracing communication skills, empathy, leadership, networking skills, conflict resolution, teamwork, problem-solving skills, and time management are a few of the distinct abilities to earn a place as an ideal employee. In a conversation with Forbes, an expert points out that employees working in financial services need to develop soft skills to distinguish themselves from the crowd.
3. Stay Well-informed
It becomes necessary for companies to be ready for upcoming changes and events in the market. During challenging times, a well-aware employee is an asset to the organization. The adaptability and flexibility of employees can help businesses to seamlessly adapt to changes in models, patterns, technology, workflow, compliance, rules, and regulations. Well-informed financial advisors can inform companies about recent changes in government policy and discuss beneficial amendments with owners. For example, multiple industries can leverage the capitalization of data in 2023 to analyze customer base, more profitable business lines, streamline business processes, and many more data-driven modifications.
4. Keep up with the Latest Trends
For a flourishing accounting profession, it is important to acquire knowledge of the latest accounting trends and the changing landscape of technology, development, and other market impacts. Financial Accounting Standard Board(FASB) constantly educates professionals on the latest standard accounting updates, which include leases, asset acquisition, debt securities, and other changes that can affect financial statements. Besides this, to understand the evolution of the accounting field, one should continuously be aware of changes in tax policies and statutory and regulatory compliance in Security & Exchange Commission(SEC) and Environmental, Social & Corporate Governance(ESG) for proactive accounting measures in businesses. Knowing and applying the benefits of data analysis, AI, machine learning, etc., can enhance business efficiency.
5. Go beyond the traditional Accounting processes
Multiple industries welcome digital transformation, such as online collaboration, remote working models, and outsourcing(freelancers) to reduce stress on the accounting department, strategize faster ROI, and give opportunities to freshers. The cloud-based accounting enhances data reliability, increases accuracy in financial forecasting, encourages team communication, ensures data security, and streamlines business operations for data-driven business performance. Modern-day accounting technology pushes professionals to achieve excellence within work and upskill their credentials.
6. Invest in Accounting Software
In recent years, accounting software has been extensively revolutionized due to automation, artificial intelligence, data analytics & forecasting tools, data security, etc., which can be beneficial to execute mundane tasks and focus on strategic planning. Automated and machine learning tools navigate repetitive tasks, saving time, money, and energy. Accountants can easily track expenses & incomes, map accounting errors, record banking transactions, and accomplish other accounting activities within no time. The AI-based technology supports employees in converting massive financial data into reports and analytical files. Financial advisors can discuss and provide input on marketing strategies, decision-making processes, budgeting, future endeavor, business expansion, etc., with in-depth information on the company’s finances.
“Never take your eyes off the cash flow because it’s the lifeblood of business.”
—Sir. Richard Branson
Moving forward with smart accounting tactics is critical for all businesses in this digital age. The future of accounting promises the extinction of traditional accounting and continuous modernization of technology, rules, and regulations based on a real-time environment. Gradual and steady transformation in accounting technology will bring revolution in the field of business and open new doors for employees in the accounting industry. A wise investment in the best accounting tool with AI can act as a savior.